Green Infrastructure Investing - Canada Leads the Way

An Example for Other Pension Funds and Countries to Consider

The report, Acting on Climate Change: Solutions from Canadian Scholars, was issued with contributions from over 60 scholars from across Canada and aimed to provide sustainability solutions for Canada. The report established an ambitious vision for Canada, stating that, the country has the potential to reach 100% reliance on low-carbon electricity by the year 2035.

According to the authors, this would result in an 80 percent reduction in emissions by the end of the century.

In order to meet this target and transition to a low carbon economy, the report highlighted the potential for hydropower to provide a low-carbon electricity source across Canada. It was found that the provinces with the largest capacity for hydroelectric power generation include British Columbia, Manitoba, Newfoundland and Labrador, and Quebec. The development of hydropower infrastructure in these high-capacity provinces along with high-voltage east-west transmission infrastructure could provide a countrywide low carbon energy source.

Hydroelectric power is a renewable energy source and uses the kinetic energy of flowing or falling water to generate electricity. The water used in the process is returned back to the natural water cycle and does not deplete the critical water resources, which we all depend on. According the Canadian Hydropower Association, the ultra-low carbon emissions of hydropower are on par with or below the carbon emissions produced by wind power generation.

With the potential for 95 percent of kinetic energy to be converted into usable electricity, the efficiency of hydropower is unparalleled.  This is compared with the best fossil fuel plants, which have about a 60% efficiency rate. Although hydropower already provides 63% of the country’s electricity, a substantial amount of additional hydropower potential exists across Canada.

 There is an opportunity for investment in hydropower infrastructure to take advantage of the country’s untapped hydropower potential and contribute to a cleaner energy portfolio in Canada.

Hydropower dams are a low-cost energy source with low operational costs, little required maintenance and a long economic lifetime. However, the construction of hydropower infrastructure requires a high upfront capital cost and represents a major barrier for investment in these clean energy projects. Therefore, in order to transition to a low carbon future, there is a need for effective financing mechanisms to overcome the high initial upfront capital required of clean energy infrastructure. Pension fund managers represent institutional investors with large pools of capital that could be deployed to finance the capital costs of hydropower infrastructure.

The current investment landscape is focused on short-term investment strategies that, discourages investment in long-term infrastructure projects, such as hydropower dams. A possible solution to bypass the short-termism embedded in investment culture is to align with institutional investors that inherently have a more long-term investment strategy.

In particular, pension fund managers are looking for “long-term investment opportunities that provide stable, predictable returns” to provide retirement income for their members.

Despite this, less than 1% of pension assets have been allocated to clean energy infrastructure projects globally, making this a key opportunity for potential future focus.

Interestingly, there is an encouraging story coming out of Canada, where pension funds have established themselves as world leaders in infrastructure investment. For example, Canada’s second-largest pension fund, the Caisse de dépôt et placement du Québec, invested in a 50% share of Dong Energy, a company responsible for the world’s largest offshore wind energy project.  The Ontario Municipal Employees Retirement System (OMERs) is the sixth leading pension fund investor in global infrastructure and provided the assets needed for the development of the Bruce Power Plant in Ontario.

 This nuclear power plant provides Ontario with 30% of the province’s electricity needs and is the largest operating nuclear-generating facility in the world.

A recent report by The Boston Consulting Group found that, as of October 2015, the ten largest Canadian pension funds manage over $1.1 trillion in assets. On top of that, these funds were also considered to be the top infrastructure investors globally. These large pension funds are able to overcome the entry barriers of infrastructure investment and maintain a diversified portfolio that includes investments “in assets aligned with long-term payout profiles.”  Additionally, approximately 75% of the assets of Canada’s top pension funds are managed internally allowing these funds to invest directly in infrastructure projects.

As a result, Canadian pension funds could play a prominent role in facilitating a shift towards a clean energy future in Canada. In particular, providing investment in hydropower projects can contribute to a more significant portion of Canada’s energy portfolio coming from a clean, efficient and reliable energy source.